Currency crisis in Russia in 2008-2009

CENTRAL BANK, EXCHANGE RATE POLICY

While financial crises firstly appeared in the United States, finally it also occurred in the Russian Federation. There are several reasons of why did it happen, both external and internal.

During about five months from September 2008 to February 2009, exchange rate of Russian ruble dropped by 47.5%. Moreover, reserves decreased by 34%. Population converted Russian rubles in dollars with fears of further depreciation. The rate of deposit withdrawn was high, since deposits were used to convert national currency into hard currency, the same was done by corporates. Moreover, companies had external debt nominated in US dollars, so they were even more interested in conversion of Russian rubles into US dollars.

In these macroeconomic situation currency crisis was possibly inevitable, and the Central Bank had a choice: it could make a quick devaluation of national currency or to make it gradually. Since the Central Bank of Russia had substantial reserves, it could choose second option – that’s what it did.

External reasons of currency crisis in Russia were:

• 1.    Sharp decrease of commodities prices. Exporters had less revenue, and in this case they had less international currency to convert in Russian rubles, consequently the supply of foreign currency also decreased, which leaded to ruble depreciation;

• 2.    Capital outflow, accompanied by currency purchase;

• 3.    Lack of opportunity to attract new loans in foreign currency, e.g. to make a restructuring of existing loans. It leaded do lack of liquidity in Russian bank, while interest rates increased

Primary internal reason of this currency crisis is the following. Rapid growth of private sector’s foreign debt, which meant the need to pay both intermediate payments, such as coupons on Eurobonds or interest payments and payments of Eurobonds’ par value. Before the crisis companies were encourage to take loans outside the country, since interest rates were low. And even though there were reserves of foreign currency in Russia, this foreign debt counterbalanced these reserves. With the beginning of currency crisis, companies and banks faced with low liquidity. So, credit lines were closed, while ruble cost of foreign debt rose significantly.

Sources:

• 1.    Avdeeva E.G. Economic nature of currency crisis. URL: http://www.econ.msu.ru/cmt2/lib/a/1857/file/Avdeeva.pdf

• 2.    Krugman P. Currency Regimes, Capital Flows, and Crises. URL: https://www.imf.org/external/np/res/seminars/2013/arc/pdf/Krugman.pdf

  "Экономика и социум" №5(24) 2016